Interest Free Loans

Not for us unfortunately.  Unless we take advantage of zero percent financing that a lot of retailers are advertising.  That is dangerous; if you do not pay the entire purchase price back during the promotional period, you owe interest on the ENTIRE purchase.  That is a nugget of knowledge I had to squeeze in, but not the main topic of this article.  Imagine borrowing $12,000 over one year at 5% interest.  You make one payment back and at the end of the year the loan is paid off.  You would pay $12,000 * 1.05, or $12,600.  Try and pay less, you will be slapped with finance charges, late fees, increased interest rates, and everything else the creditor can legally throw at you.

Believe me; these interest free loans happen all the time, right under our noses.  What if I further told you that YOU were the creditor?  It’s pretty sneaky, and unless you really analyze it, you probably don’t see it.  Your hard earned money gets taken out of every paycheck, before you see it, and paid to the federal, state and sometimes local government.  This is very convenient if you are paying the correct amount in and at the end of the year owe $0 and get a refund of $0.  That’s how the system was initially set up.  With how complex the tax code is however, it is virtually impossible to be able to micro manage everyone’s taxes so that happens.  They try though! 

One of the first things we do when we are employed is fill out a tax form called the “W4”.  The main reason for this form is to determine how many ALLOWANCES you are taking.  They give us a little worksheet to help us figure this foreign concept out, and for many of us we have no idea what or why we put down the number we did.  I would always put down “0” or "1".

Well a “0” or "1" tells our employer to expect the worst in regards to taxes owed and take out the most from our paychecks to prepare for it.  Every year I’d file my taxes and I’d get a monster refund because of my low income and various credits and deductions I qualified for.  This refund felt like I was being PAID!  I’m sure you all know the feeling.  Turns out I really wasn’t, I was merely being refunded all the money I had been paying in throughout the year.  I pay interest on all the loans I have, but I didn’t receive any interest for the loan I had just made to the government. 

In this economy it’s hard to get 5% on any investment, but even 1% of $12,000 is $120, and that’s about what I could have made, had I put that same dollar amount into a savings account.  (Note – I didn’t pay anywhere near that much, this is just an example!)  According to the IRS website, 324.1 BILLION dollars of refunds was sent back to tax payers from their '08 returns filed.  I tinkered with my W4, cautiously at first in fear of suited men taking me away.  I never was, and now what I do is claim EXEMPT!  Not the entire year, just January through something like September or October, depending on how much I think I’ll owe.  Don’t know how much you’ll owe?  Look at last year’s return!  It is usually a good indicator, especially if not much has changed in your life (new kids, new house, new job). 

One major responsibility a financial planner has for clients is managing taxes and minimizing tax liability.  Anyone dealing with the markets and investing has to combat a risk called Beta already (briefly described in an earlier post), they also combat taxes.  It’s not terribly difficult to plan for them on our own, and look out for a future post from me to help you do just that.  For now though, give a minute to think about that concept of free lending we are doing to Uncle Sam.

Rent vs. Packer Tickets

What’s the buzz all about? Each day the stock market can be very volatile; large gains and losses can and do happen every day. Speculators will bet their shirt that a company is doing well, and will put a lot of money on the line before the results are in. How do we know whether this savvy investor was correct in their assumptions and speculations? Best Buy doesn’t hold up a sign in front of their stores advertising their sales and profits every day. I would have no clue how any company is doing really just by walking into their store. Even a packed Best Buy doesn’t mean the other 1,149 locations worldwide are also (that is a Wikipedia figure, so it must be true!). A stock price is affected by many things, but most can be classified into two categories; speculation and results. Speculation includes that savvy investor and all his information gathering and assumptions derived from his sources. But where do we find results?

In accounting we make a thing called an income statement. The people want to know whether a company is profitable, and this sheet of paper will appease them! This document takes a long time to create, and is widely used by corporations, investors, banks and anyone else interested in how the company is performing. It’s a simple document when you boil it down, and it’s very useful. On the top of the document it adds up all of the money the company made in a period. Then it nets out all of the expenses incurred. It also classifies all of the expenses into categories that show where the expenses occurred. There are product expenses, selling expenses, salary expenses and all sorts of others. At the bottom of the page there is a magic number called “net income.”

It turns out the most recent income statement of Best Buy showed them to be doing quite well. That probably explains why they wouldn’t haggle at all with me when trying to purchase a new TV before the first Packer game. I bought it anyways, even after they bruised my ego by not negotiating!

Well we have a net income too, and that is essentially what we have in our bank account after a given period; be it a week, month or year. The government is certainly interested in our net income, as this figure will help determine how much tax you pay. Banks are certainly interested, the more you have in there means the more they can lend out and make money. You should be interested too! Keeping track of your “net income” and what you do with it will have an enormous impact on what you spend, what you save and your basic knowledge on “where the money goes.” I try to look at mine every month at a minimum. When you hear people talk about budgets, all they are really doing is making an “I think I’ll make this much so I should spend this much” income statement.

A picture like this may seem pretty dull, but when you put your own numbers in there and make your own categories I’ll bet you’d be just as surprised and interested as that savvy investor to see the results! When you meet with financial planners, something like this is a big part of what you are paying for. You can save an awful lot of money by attempting this yourself.

After you have this picture, it becomes much easier to shop around for cost savings. I spent nearly two hours talking with a big cable TV company before finally hanging up without making a change to my current plan. I did this because the number they were telling me I would have to pay each month would have been higher than I was currently paying, without any real gain in service. It almost becomes a game to see how low you can get those expenses and how high you can get that income. Think of yourself as a company, and try to post the biggest net income you can. Your (theoretical) stock price will soar, and your (actual) confidence and esteem will also. When you have that rush of excitement, it’s either time to switch careers to become an accountant, or at least pride yourself in creating a successful plan for your future.

Get Rich Quick

We all want to, and most of us are willing to work hard to get there, but we don’t know how. We are all equal, and yet some have the financial means to do whatever they want on this bouncing ball while we are stuck making bread in our full-time jobs. Stuck in the rat race. The grind. Bill Gates had a wonderful vision about personal computers. Warren Buffet had an excellent philosophy about long-term stock investing. Alex Rodriguez did it by belting 600+ home runs in Major League Baseball, although there is some speculation that he may have had help.

Assuming the vast majority of us don’t have the natural talent or brilliant foresight into the future, we’re stuck in the grind. What if that’s not enough for some of us? We’re all equal, and especially in the good old USA, we are free to work, and be rewarded for that work. The harder you work; theoretically the more you should be paid. Is that how we get rich? Work our tails off our whole life and retire at 65 with a retirement package that will keep you comfortable to the end of your days? It is a possibility, but it is a little sad thinking you’ll be working until you are well over the hill!

To get rich quick. I was on the phone a few nights ago with a real estate investing company where they promised me just this. It would take a lot of hard work, and also a lot of risk. They only chose 4% of inquiries to become success stories. The ones you see on television at 2-3 in the morning. The motivators that get us thinking, we too, could live the high life. I couldn’t believe how lucky I was to have been chosen! I listened to his sales pitch, and I bought into it initially. In six months I could make $50,000? “Why am I waiting,” he asked. Boy I don’t know why I would wait to make $50,000 in six months! I just need the tools and that’s what they offered. My chance to get rich; just filthy rich!

They started asking about my credit card limits, any assets I had that could be borrowed from and saying the key was “OPM” (other people’s money). How rude I thought! The OPM they were talking about to me was MY MONEY! Now I’m an opportunist, and if the right business idea came my way I would jump on it, and as a side note, I would really enjoy accounting for it also. But the longer I stayed on the phone with this salesman, the more I realized that getting rich quick the way he was talking about is maxing out all of my credit cards to start flipping houses. Sounds like a great idea, especially in this seller’s market!

This isn’t the first get rich quick scheme I almost tangled myself into. I’ve mentioned the financial services company where I worked on pure commissions. Come to find out the company was a MLM (multi-level marketing) company, or a pyramid scheme when you boil it down really. While not illegal, there are certainly arguments out there about the ethics behind such a thing! Anyways, from my experiences attempting to get rich quick, I’ve found the best way to get rich quick is to do one simple thing. And that is to save as much as you can, as early as you can. While you save it, invest your money and let it start working for you. Einstein said the most powerful tool in the universe was compound interest. Take that Newton and your “gravity!” It won’t guarantee quick wealth, nor even tease you with it really, but especially if you manage the risk you take on, I assure you it will work!

You must now be thinking “manage my risk? Who the hell is this guy and what is this garbage he is talking about managing risk?” There is a tradeoff in the marketplace and think of a marketplace very loosely: anywhere that there is buying and selling going on. The tradeoff is risk vs. return. If you want to get rich quick, you have to think of the opposite side as well. The allure of fast wealth is married to the inverse; vast debt and potential bankruptcy. The chance to double your money comes with the risk of losing it all.

Now if you have a skill, a product, or an idea that you see value in, that is another story. Find an accountant or a lawyer and get your idea out there. Make a business and be your own boss. This country needs jobs, and jobs are created through innovative thinking and entrepreneurship from fine folks such as you! Instead of buying into get rich schemes where you have to follow the lead, be a leader yourself and start that company you’ve always thought of. It won’t be quick, and it won’t be easy, but if you want to build that empire, build it yourself!

For those of us who don’t have that drive, there’s a great thing called stocks, where we can own a small piece of another’s grand idea. If you buy enough of them you have yourself a portfolio, and that portfolio has a measurement called Beta. Beta is a measure of risks! They pay financial analysts to look at the companies, their performance and their expectations, and come back with a risk level. Beta is what they call it in the stock market, but in the game of life Beta is nothing more than a measure of risk. How great is that? For a very small percentage of your savings, someone will manage your risk for you, giving you the greatest opportunity to build wealth, while minimizing the risks associated with it.

I am planning a wedding for next fall, and the $50,000 the company dangled in front of me could have been nice, and could have made for one hell of a wedding. I started thinking about the risk, and the prospect of filing for bankruptcy with a wedding looming was a scary thought; I declined their fool-proof path to financial freedom. I’m in the process with two business partners of making our own LLC anyways, and even though I don’t see $50,000 coming from it in the first six months, I think whatever does come from it will be much more predictable and much less risky. The route that we are taking is the best realistic shot we have of getting rich quick, and we’re doing it on our own terms. And if that doesn’t work I’ll have to pick up the pen and write the next big thing to hit the radio waves… Or get back in touch with my glory days; get back in shape, and give baseball another try!

Kevin

Insurance

Retirement planning is getting more complicated than ever.  With pensions going by the wayside and personal retirement plans replacing them we are finding ourselves with many more things to think about.  A pension brought about a worry-free (or so many thought!) way to retire comfortably.  A very nice padding to the Social Security we’ll all receive when we hit 65.  Or is it 68 now?  That doesn’t seem too reliable these days either now does it!  

  How can you save for retirement when life is happening right now?  A mortgage payment, car payment, credit cards and not to mention kids or any student loans are just a few of the creditors that call our names every month!  And then there is this necessary evil called insurance.  In the State of Wisconsin they made it mandatory for Auto insurance.  Now what about life insurance?  What about health insurance?  Your employer may cover that for you, and possibly Uncle Sam.  Bless them if they do, as it is one expensive burden.  

One of the many hats I wear is an Insurance Specialist.  After college I had a short stint with a financial services company where I studied diligently for my Life Insurance licensing.  I learned an awful lot and an awful lot more than I deemed necessary.  Many insurance companies these days are pushing for complete coverage.  They don’t want to fork out a lump sum when you die, they want to fork out a lump sum and a whole mess of other amenities to ensure you are comfortable in the tragic event where you or your loved ones will need the lump sum payment.  

My advice to all of you is to not buy into any of it!  It is expensive for you, and you are buying luxuries you don’t need.  Most insurance companies are a BUSINESS, out to make a PROFIT.  When I go to McDonald’s I will usually order from the dollar menu.  A hamburger will fill me up and satisfy my hunger.  A #1 Big Mac Meal will do the same, but it will cost you a whole lot more.  Now I want to introduce you the dollar menu of insurance, and that is term insurance.  No promises, no extra amenities, no riders or any other insurance gimmick.  Term insurance is bare bones, if you die, you get $X.  And that $X is the most you’ll get for your dollar, because there are no large fries or expensive soda included.

Think about all of your debts in one lump sum.  Think about the expenses your family will incur upon your death.  Now think about something happy because I’m putting you down a dark road!  Add up all those student loans, mortgages, other loans, funeral costs, and a healthy amount additional to leave your family.  If you don’t know what to leave them, think that they will probably work so you won’t need to completely replace your income, although you can do this if you want.  Take a number, like say $300,000 and multiply that by 3%.  In most cases that is guaranteed interest income off of an investment, and that is a conservative estimate at that.  That’s an annual income your beneficiary will receive if they don’t touch the $300,000.  Ok I’ll do the math for you, $300,000*.03 = $9,000.  So take that number, add your mortgage and any other loan to it, and that is your target.  Subtract out any savings you currently have, because you don’t need cash insured.  That magic number may be $500,000.  Now compare term insurance and whole insurance and see what the premiums would be on both of those.  Big difference hey?  As you get older, you will need less and less insurance.  Why?  Because you are investing and growing your own insurance, aren’t you? 

You can save hundreds or thousands of dollars per year this way.  What do you do with that extra income?  Invest it!  Many finance companies will take a small sum of money that you decide from you on a monthly basis and put it into a very safe investment fund.  There is no guarantee cash value that an insurance company offers (the large fries), but I can GUARANTEE you that what they do with your money is the same thing.  If you look at the investments short term, you will see stagnant results and so be it.  In my opinion that is good, you are getting investments dirt cheap right now.  Long term however, you’ll get much better return than those CD’s, or that savings account, and definitely that mattress.

I want to keep talking about how to invest that difference and where to do it.  But I’ll save that one for another day!